report smeig meeting feb 13
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The IASB is the independent standard-setting body of the IFRS Foundation, a not-for-profit corporation promoting the adoption of IFRSs. For more
information visit www.ifrs.org
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SMEIG ref 4
STAFF PAPER March 2013
SMEIG Meeting
Project Comprehensive review of theIFRS for Small and Medium -
sized Entit ies(IFRS for SMEs)
Paper topic Report of the SME Implementation Group
CONTACT(S) Darrel Scott (BoardAdvisor)
dscott@ifrs.org +44 (0) 20 7246 6489
Michelle Fisher mfisher@ifrs.org +44 (0) 20 7246 6918
This paper has been prepared by the staff of the IFRS Foundation for discussion at a public meeting of theIASB and does not represent the views of the IASB or any individual member of the IASB. Comments onthe application of IFRSs do not purport to set out acceptable or unacceptable application of IFRSs.Technical decisions are made in public and reported in IASB Update.
Purpose of this paper
1. This SMEIG Paper 4 presents the report of the SME Implementation Group
(SMEIG) containing their recommendations on possible amendments to theIFRS
for SMEsbased on discussions at the 4-5 February 2013 SMEIG meeting.
Structure of this paper
2. This SMEIG Paper 4 is set out as follows:
(a) Introduction
(b) Development of the report of the SMEIG
(c) Part I: SMEIG recommendations on issues addressed by individual
questions in the Request for Information (RFI): Comprehensive Review
of the IFRS for SMEs
(d) Part II: SMEIG recommendations on other issues raised by respondents
to the RFI
(e) Part III: Other points raised by SMEIG members
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Introduct ion
3. The SMEIG met on 4 and 5 February 2013 for the first time in person. The
SMEIG has previously conducted all of its work by email. The objective of the
meeting was for the SMEIG to discuss the public comments received on the RFI
and develop a set of recommendations for the IASB on possible amendments to
theIFRS for SMEs.
4. At the SMEIG meeting the IASB staff presented three papers to the SMEIG:
(a) SMEIG Agenda Paper 1: Cover paper providing background
information on the comprehensive review.
(b) SMEIG Agenda Paper 2: Covers the issues addressed by individual
questions in the RFI. For each issue this paper provides a summary of
the main comments received in comment letters, the IASB staffs initial
recommendation based on those comments and questions for the
SMEIG to discuss.
(c) SMEIG Agenda Paper 3: Covers other issues raised by respondents to
the RFI. This paper sets out the issues raised by respondents, the IASB
staffs initial recommendation and questions for the SMEIG to discuss.
These three papers are available on the IASB website via the following link:
http://www.ifrs.org/Meetings/Pages/SMEIG-Feb-13.aspx.
5. This SMEIG Paper 4 provides the SMEIG recommendations on the issues in
SMEIG Agenda Paper 2 and 3. For background information on the issues
discussed and the associated comment letter analysis please refer to SMEIG
Agenda Paper 2 and 3.
Developm ent of the report of the SMEIG
6. The process for developing the report of the SMEIG (as presented in this SMEIG
Paper 4) was as follows:
(a) Based on discussions at the SMEIG meeting, IASB staff prepared an
initial draft of the SMEIG report.
http://www.ifrs.org/Meetings/Pages/SMEIG-Feb-13.aspxhttp://www.ifrs.org/Meetings/Pages/SMEIG-Feb-13.aspxhttp://www.ifrs.org/Meetings/Pages/SMEIG-Feb-13.aspx -
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Part I: SMEIG Recommendations on issues addressed by individualquestions in the RFI
Content
8. Part I covers the following issues in SMEIG Agenda Paper 2:
(a) Scope of theIFRS for SMEs(Issue 1-3)
(b) New and revised IFRSs (Issue 4)
(c) Accounting policy options (Issue 5-7)
(d) Income tax (Issue 8)
(e) Two issues on specific paragraphs in theIFRS for SMEs:
(i) Amortisation period for goodwill and other intangible assets
(Issue 9)
(ii) Presentation of share subscriptions receivable (Issue 10)
(f) Inclusion of additional topics in theIFRS for SMEs(Issue 11)
(g) SMEIG Q&As (Issue 12).
Issue 1) Use by publicly traded entities
9. Are the scope requi rements of the IFRS for SMEs cur rentl y too restr icti ve for
publ icly traded enti ties?
The majority of SMEIG members recommend deleting paragraph 1.5 of the IFRS
for SMEs. They consider that local authorities are best placed to decide whether the
IFRS for SMEsshould be permitted or required for any entities in their jurisdiction.
However, these SMEIG members feel that theIFRS for SMEsshould remain clear that its
intended scope is entities that do not have public accountability and its requirements
should not be amended to cater for publicly traded entities.
A significant minority of SMEIG members recommend retaining paragraph 1.5.
They believe all publicly traded entities should be applying full IFRSs. Alternatively,
they would support replacing paragraph 1.5 by a requirement for such entities to disclosethat they are not in the intended scope of theIFRS for SMEs.
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SMEIG discussion
10. Whilst the broad view of the SMEIG was that publicly traded entities should in
general apply full IFRSs, the majority also considered that there are limited
circumstances where theIFRS for SMEscould be appropriate for a publicly traded
entity or group of entities. These SMEIG members supported deleting paragraph
1.5 of theIFRS for SMEsbecause they consider local authorities best placed to
judge whether theIFRS for SMEsshould be permitted or required for entities
within their jurisdiction.
11. Nevertheless, these SMEIG members considered this an exception. They felt that
theIFRS for SMEsshould remain clear that its intended scope is entities that do
not have public accountability. It therefore follows that, when amending theIFRS
for SMEs, the IASB should keep the same mind-set and not cater for publicly
traded entities.
12. A significant minority of SMEIG members supported retaining paragraph 1.5.
These SMEIG members felt all publicly traded entities should have consistent
reporting requirements and that it would be confusing to have two sets of
standards used by publicly traded companies in different jurisdictions.
Furthermore they argued theIFRS for SMEswas not developed to cater for
publicly traded entities. Some SMEIG members felt that if paragraph 1.5 is
deleted it should be replaced by a requirement for entities to disclose that they are
publicly traded entities and are not in the intended scope of theIFRS for SMEs.
13. An additional point raised was whether the definition of publicly accountable
could be modified to cater for both views summarised in paragraphs 10-12 above.
For example, the IASB could add more flexible guidance for jurisdictions to
determine which entities are publicly accountable. Therefore, in limited cases,
publicly traded entities could fall within the scope of theIFRS for SMEsif they
are essentially more like entities without public accountability (for example they
have a limited number of investors).
Issue 2) Use by financial institutions
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14. Are the scope requi rements of the IFRS for SMEs cur rentl y too restr ictive for
enti ties that hold assets for a broad group of outsiders as one of their primary
businesses?
The majority of SMEIG members recommend deleting paragraph 1.5 of the IFRS
for SMEs. Consistent with their views for Issue 1, they consider that local authorities are
best placed to decide whether theIFRS for SMEsshould be permitted or required for any
entities in their jurisdiction that hold assets for a broad group of outsiders as one of their
primary businesses (eg financial institutions). Equally, these SMEIG members feel that
theIFRS for SMEsshould remain clear that its intended scope is entities that do not have
public accountability and its requirements should not be amended to cater for publicly
accountable entities.
A significant minority of SMEIG members recommend retaining paragraph 1.5.
Consistent with their views for Issue 1, they believe all entities that hold assets for a
broad group of outsiders as one of their primary businesses should be applying full
IFRSs. As an alternative, they would again support replacing paragraph 1.5 by a
requirement for such entities to disclose that they are not in the intended scope of the
IFRS for SMEs.
SMEIG discussion
15. Whilst the broad view of the SMEIG was that entities that hold assets for a broad
group of outsiders as one of their primary businesses should in general be
applying full IFRSs, the majority of SMEIG members acknowledged that
circumstances vary across jurisdictions. SMEIG members provided examples of
micro banks and small credit unions that could in essence be more like entitieswithout public accountability and many do not have complex transactions.
16. However, some SMEIG members were concerned that theIFRS for SMEsdoes
not sufficiently cater for the complexity of transactions most financial institutions
and similar entities enter into. As for Issue 1 SMEIG members generally felt the
IFRS for SMEsshould remain clear that its intended scope is entities without
public accountability and not try to cater for entities with complex financial
instrument transactions.
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Issue 3) Clarification of use by not-for-profit (NFP) entities
17. Should the IFRS for SMEs be revised to clar if y whether an NFP enti ty is
eli gible to use it?
The SMEIG recommends that no change be made to the I FRS for SMEs. In the view
of the SMEIG, paragraph 1.4 is clear that soliciting and accepting contributions does not
automatically make NFP entities publicly accountable.
SMEIG discussion
18. The broad view of the SMEIG was that soliciting and accepting contributions
does not automatically make an NFP entity publicly accountable. Furthermore
SMEIG members did not think further clarification is necessary in the IFRS for
SMEs. They noted that paragraph 1.4 clearly states that if charitable organisations
hold assets in a fiduciary capacity for a broad group of outsiders for reasons
incidental to their primary business that does not make them publicly accountable.
19. A few SMEIG members expressed support for the IASB considering issues
specific to NFP entities as part of a separate project. An international standard
would prevent jurisdictions from having to develop their own standard/guidance if
guidance for NFPs is deemed necessary in that jurisdiction.
Issue 4) Consideration of new and revised IFRSs
20. As a matter of pol icy, how should the IFRS for SMEs be updated for new and
revised I FRSs and annual improvements?
The SMEIG made the following recommendations:
a) Changes to theIFRS for SMEsshould be driven in order of priority by:
(i) implementation experience of SMEs, and
(ii) changes to full IFRSs.
b) New or significantly amended IFRSs should not be incorporated until
implementation experience has been assessed (after the post-implementation
review). Exceptions may be considered, for example where they would help
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solve a known problem for SMEs, or changes are simplifications and easily
understood.
c) Minor amendments to full IFRSs should only be incorporated where there is a
known problem for SMEs.
Applying these principles, the SMEIG recommends:
a) Changes to IAS 19 should be incorporated during this review.
b) Changes to IFRS 3, 10, 11, 12 and 13 should wait until implementation
experience has been assessed
SMEIG discussion
Objective of the I FRS for SMEs
21. The SMEIG had a general discussion about the objective of theIFRS for SMEs.
The majority of SMEIG members considered that the main focus of the Standard
should be on the users of the financial statements. SMEIG members envisaged
entities applying theIFRS for SMEswould be those with a limited or closed user
group and where the users are likely to be less distant from the entity. The SMEIGfelt this is consistent with the current scope of the IFRS for SMEs, which is based
on public accountability. A few SMEIG members felt that the Preface to theIFRS
for SMEsshould reflect the objective of theIFRS for SMEsmore clearly.
22. In line with paragraph 21, the majority of SMEIG felt the main focus when
making changes to theIFRS for SMEsshould be on the needs of the users of SME
financial statements. Other factors such as the size of the entity, the complexity of
its transactions and the resources available to it, are secondary factors to considerwhen making changes to theIFRS for SMEs.
23. A few SMEIG members noted that size and complexity of entities using theIFRS
for SMEswould be self-regulating. For example, entities with a wider range of
complex transactions may find that theIFRS for SMEsdoes not cater for their
needs and so they would need to apply full IFRSs.
24. The broad view of the SMEIG was that theIFRS for SMEsshould be maintained
as a standalone standard catering for the specific requirements of SMEs. Based on
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A significant minority of SMEIG members recommend not permitting a revaluation
option. These members emphasised concerns with users of SME financial statements
being less able to deal with different options, and the added complexity options introducein the Standard.
SMEIG discussion
31. SMEIG members were divided on this issue. Those who supported adding the
option noted that in certain jurisdictions, the valuations of PPE could change
significantly between periods. Additionally, they noted that in certain industries,
it is common for PPE to form a significant part of the reported value of an entity.
Those SMEIG members further argued that this information is useful for making
credit decision relating to the entity. In the view of those supporting the change,
under in particular these circumstances, the revaluation of PPE would constitute
more relevant information.
32. Other SMEIG members did not support an option. These members felt that an
option would add complexity to the Standard. They noted that complexity comes
in multiple formsthe additional complexity relates to the actual form of the
Standard which would have to incorporate the option, the judgement required
from the preparers in deciding which option to pursue and the care necessary from
users who would have to determine which option had been chosen. These
members also noted that entities are free to disclose the fair value of PPE in their
financial statements, and that this disclosure should suffice for credit decision
making.
33. SMEIG members also noted a concern that once one additional option wasintroduced into the standard, it may prove difficult not to introduce other options.
Issue 6) Capitalisation of borrowing costs/development costs
34. Should Section 18 be changed to permi t or requi re capitali sation of
development costs on a simi lar basis to IAS 38?
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A slight majority of SMEIG members recommend allowing SMEs an option to
either expense (current treatment) or capitalise development costs. SMEIG members
note that this issue is similar to Issue 5, but that it would only affect relatively few SMEs.
A strong minority of SME members recommend no change to current requirements
for cost-benefit reasons.
A smaller minority recommend requiring capitalisation of development costs based
on similar criteria to IAS 38.57, but adding an undue cost or effort exemption. These
members emphasise the importance of aligning theIFRS for SMEswith full IFRSs.
35. Should Section 25 of the I FRS for SMEs be changed so that SMEs are requi red
to capitali se borr owing costs on a simil ar basis to IAS 23?
SMEIG members have the same views as for accounting for development costs.
36. SMEIG members discussed these two issues at the same time. They noted some
similarity between these issues and Issue 5, and acknowledged the concern
expressed in paragraph 33 above.
37. Those SMEIG members who supported introducing an option noted the
significance to certain industries of development and interest costs. They also
stressed their concern that the accounting required under full IFRSs is not
permitted under theIFRS for SMEs. They noted their view that based on the
IASBs decisions under full IFRSs, it is apparent that the capitalisation approach
produces more relevant information. However, they also conceded that these
changes would apply to relatively few SMEs, and that the accounting approach
would be onerous for many SMEs to apply. Consequently, they supported an
option.
38. Those SMEIG members who supported no change to the current requirements did
so for many of the same reasons set out in paragraph 32.
39. The small minority of SMEIG members who supported changing the standard to
introduce a requirement for the capitalisation of development costs supported
most of the arguments put forward by the majority (set out in paragraph 37
above). However, these SMEIG members also agreed that adding an option
created complexity. Consequently they felt that the issues described could be
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dealt with by making the capitalisation approach a requirement, with an undue
cost or effort qualifier to alleviate the potentially onerous nature of the
requirement.
Issue 7) Use of recognition and measurement provisions in full IFRSs forfinancial instruments
40. How should the current option to use I AS 39 in the I FRS for SMEs be updated
once IFRS 9 has become effective?
The SMEIG recommends:
a) Removing the fallback to IAS 39.
b) Failing that, the IAS 39 fallback should be retained until IFRS 9 is
considered for incorporation in the I FRS for SMEs.
If the second alternative is followed, the SMEIG recommends that the fallback to
IAS 39 should only be deleted once IFRS 9 has been considered for incorporation.
SMEIG discussion
41. The SMEIG generally felt the fallback to full IFRSs should be removed.
However, it was agreed that before doing so it was important to assess to what
extent the fallback was being used in practice. This could be done by asking a
question in the exposure draft of amendments to theIFRS for SMEs. Several
SMEIG members stated that in their experience few entities were using the
fallback in practice and it was limited to subsidiaries of full IFRSs groups.
42. If feedback on the exposure draft indicates that the fallback to full IFRSs is being
used more widely in practice, the SMEIG felt the fallback to IAS 39 should be
retained until IFRS 9 is considered for incorporation in theIFRS for SMEs(under
the criteria established in Issue 4). Once IFRS 9 is considered for incorporation,
the fallback to full IFRSs could be deleted.
43. SMEIG members would not support allowing a fallback to IFRS 9 once it
becomes effective as this would result in entities needing to do a two-step
transition (firstly from IAS 39 to IFRS 9, and secondly from IFRS 9 to Section
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11/12 when IFRS 9 is incorporated and the fallback to full IFRSs is deleted). It
was generally noted that a fallback to a superseded standard is not ideal. However
the strong preference is to remove the fallback altogether if it is found that thefallback to IAS 39 has limited use in practice.
Issue 8) Acc ount ing for incom e tax
44. Should Section 29 Income Tax be revised?
The majority of SMEIG members recommend that Section 29 should be aligned
with IAS 12.
A small minority of SMEIG members recommend requiring a taxes payable
approach with additional disclosure requirements for cost-benefit reasons.
An even smaller minority recommend a temporary difference approach with an
undue cost or effort exemption(fallback to the taxes payable method).
Further, the SMEIG recommends that the amendment to IAS 12 to add a rebuttable
presumption that the carrying amount of investment property measured at fair
value will be recovered entirely through sale should be incorporated in Section 29.
This is because entities applying full IFRSs have found the amendment to be a
simplification and reduce subjectivity.
SMEIG discussion
45. The SMEIG noted the complexity of applying IAS 12, however some members
also acknowledged the economic validity of recognising deferred tax. Members
further noted that the earlier recommendation to revalue PPE further emphasised a
requirement for a deferred tax type recognition.
46. On balance, a majority of SMEIG members supported a proposal thatIFRS for
SMEsbe amended to align with the principles of IAS 12. These members argued
that deferred taxation provides important and relevant information about an entity,
and agreed with the basic economic rationale for the deferred tax treatment.
Whilst acknowledging the flaws and complexities of IAS 12, they felt that it was
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operating in practice, and that many practitioners were comfortable with it. These
members stressed the importance of alignment with full IFRSs.
47. A minority of SMEIG members, whilst acknowledging the economic rationale for
deferred tax, supported a tax payable model. These members placed more
emphasis on the simplicity and verifiability of the tax payable model, and less on
the relevance of the deferred tax model. They feel the benefits of deferred tax
information are questionable and that many users do not understand the
information provided.
48. A smaller minority acknowledged both views set out above, and believed these
could be reconciled by requiring alignment with IAS 12, but with an undue cost
and effort override.
Issue 9) Amortisation period for goodwill and other intangible assets
49. Should paragraph 18.20 be modif ied?
The SMEIG recommends that paragraph 18.20 be amended as follows:
If an entity is unable to make a reliable estimate of the useful life of an intangible asset, theuseful life shall be determined based on management's best estimate and shall not exceed 5
years.
The SMEIG suggest that staff give further consideration to the words best estimate.
SMEIG discussion
50. The SMEIG characterised paragraph 18.20 as a two-step approach. In the first
step, the entity determines whether it can reliably estimate the useful life of an
intangible asset. If so, it uses that value. If not, it proceeds to the second step.
51. The SMEIG noted that, by definition, an entity applying the second step does not
have reliable information. SMEIG members accepted that in this circumstance,
the entity should use the best information it has available to determine the useful
expected life of the asset. The SMEIG also strongly supported the view that this
estimate should be curtailed or restricted to a relatively short period. It was noted
that for some entities the 10 year default life would not be too long, eg where
intangible assets like customer lists that sometimes have long lives are included
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within goodwill. However, on balance, the SMEIG felt that the 10 year period
currently in the standard was too long. After some discussion, the members
generally supported a period of five years.
52. Members expressed some concern with the terminology reliable estimate and
best estimate and asked that staff review term used in full IFRSs before
confirming this usage.
Issue 10) Presentation of share subscriptions receivable
53. Should paragraph 22.7(a) be modif ied or deleted?
The SMEIG recommends that Paragraph 22.7(a) be deleted.The SMEIG note that
full IFRSs is silent on this issue and there are mixed views across jurisdictions of whether
the share subscription receivable should be treated as an asset or offset to equity. The
SMEIG further suggest that additional guidance on classification of share subscriptions
receivable could be provided in education material.
Issue 11) Inclusion of additional topics in the IFRS for SMEs
54. Are there any topics that are not specif ical ly addressed in the IFRS for SMEs
that should be covered?
The SMEIG recommends that no additional topics need to be specifically addressed
in the I FRS for SMEs. The general guidance in paragraphs 10.410.6 is sufficient to
deal with the topics suggested by comment letters.
Issue 12) Q&As
55. Should the Q&A programme continue after th is comprehensive review is
completed? I f so, shou ld any changes be made to the cur rent programme?
The SMEIG recommends that the Q&A programme should continue as a two tier
system:
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- Tier 1 issues would be those requiring authoritative guidance and would require
full due process.
- Tier 2 issues would be dealt with by non-mandatory education material subject to
the normal due process for educational material.
The SMEIG also recommends:
- The IASB should establish a procedure for constituents to submit issues to
SMEIG via the IASB website.
- The IASB should interact with local standard setters to encourage them to address
local issues (eg scope issues), and to submit more significant issues to the SMEIGfor consideration. It was acknowledged that this process would need to be
governed well to ensure local jurisdictions do not issue interpretative guidance.
The SMEIG recommends where possible, Q&As should be incorporated in the IFRS
for SMEs and deleted. The majority of SMEIG members think that other Q&As should
be maintained separately to the extent they remain relevant. However, a minority of
SMEIG members believe any Q&As that are not incorporated in theIFRS for SMEs
should be included in the IFRS Foundation education material and deleted.
Q&As programme
56. The broad view of the SMEIG is that the Q&A programme should continue.
However SMEIG members felt it would be better to have a two tier system for
dealing with questions raised:
(a) Tier 1 issues would be those requiring authoritative guidance. Any
SMEIG guidance on these issues would require full due process. Issueswould have to pass a high hurdle before they could be treated as Tier 1
guidance. Such issues would probably only be required if a problem
was identified with theIFRS for SMEsand would be rare.
(b) Tier 2 issues would be dealt with by non-mandatory education material
developed by the SMEIG. This guidance would be subject to the same
due process as other educational material (a lesser due process than
currently required for Q&As).
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57. SMEIG members also noted that the SMEIG should avoid dealing with issues that
are also issues under full IFRSs, where possible.
Identifying issues through national standard setters
58. The SMEIG generally felt that the IASB should interact with local standard
setters to encourage them to:
(a) identify issues causing problems in their jurisdictions, and
(b) to provide a mechanism to support entities in the jurisdiction, including
addressing localised issues.
It was acknowledged that this process would need to be governed well to
prevent local jurisdictions interpreting the standard and a formalisation of the
understanding between the IASB and the local standard setters might be
required.
59. The SMEIG also felt that the IASB should encourage standard setters (and other
accounting organisations) to submit significant issues to the SMEIG. Local
standard setters could act as a filter by providing guidance on smaller localised
issues (eg helping the different types of entities in their jurisdiction determine
whether they are within the scope of theIFRS for SMEs), but should submit
significant issues that are likely to affect other jurisdictions to the SMEIG for
consideration.
Submitting issues via IASB website
60. The SMEIG broadly felt that the IASB should also establish a procedure for
constituents to submit issues to SMEIG via the IASB website (as set out in
paragraph 19 of the SMEIG Terms of Reference). However, many SMEIG
members expressed concern that this could lead to a high volume of issues being
submitted to the SMEIG. Therefore, it would be important for the IASB to
manage expectations about the manner in which submissions would be dealt with.
A few different suggestions were made by SMEIG members. One suggestion that
received broad support from SMEIG members was that issues submitted by
respondents should not be posted online and that issues should as a matter of
course be considered in developing the education material. Only issues that were
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prevalent in multiple jurisdictions, or of particular urgency, or pervasive to the
literature would be forwarded the SMEIG for their consideration.
Existing Q&As
61. The SMEIG felt that, where possible, Q&As should be incorporated in theIFRS
for SMEsduring this review (and future reviews) and deleted. The majority of
SMEIG members think that the other Q&As should be maintained separately to
the extent they remain relevant. However, a minority of SMEIG members believe
any Q&As that are not incorporated in theIFRS for SMEsshould be included in
the IFRS Foundation education material and deleted. SMEIG members felt that
Tier 1 Q&As should always be incorporated and deleted.
62. SMEIG members generally supported dealing with the existing Q&As as follows:
Q&A number and title SMEIGssuggested treatment
2012/04
Recycling of cumulative exchangedifferences on disposal of a subsidiary
Can easily be incorporated by modifying thewording in paragraph 9.18. Q&A can be deleted.
2012/03
Fallback to IFRS 9FinancialInstruments Dealt with under Issue 7. Q&A can be deleted.
2012/02
Jurisdiction requires fallback to fullIFRSs
Too detailed to incorporate. Q&A will bemaintained separately as Tier 2 non-mandatoryeducational Q&A.
2012/01
Application of undue cost or effort Dealt with under Issue A.13.
2011/03
Interpretation of tradedin a publicmarket
Too detailed to incorporate. Q&A will bemaintained separately as Tier 2 non-mandatoryeducational Q&A.
2011/02
Entities that typically have public
accountability
Need to relook at the Q&A after the IASBmakes a decision on the scope (see Issues 1 and
2).
2011/01
Use of theIFRS for SMEsin aparentsseparate financial statements
Can be incorporated in paragraph 1.6. Q&A canbe deleted.
In particular, theIFRS for SMEsshould clarify ifa parent can prepare consolidated financialstatements under either full IFRSs or localGAAP and present its separate statements undertheIFRS for SMEs.
Part II: SMEIG recommendations on other issues raised by respondents tothe RFI
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Content
63. Part II covers the following issues in SMEIG Agenda Paper 3:
(a) Issues on specific requirements in theIFRS for SMEs(Issues A.1-A.13)
(b) General issues about theIFRS for SMEs(Issues B.1-B.3)
Issue A.1) The revised IFRS Conceptual Framework
64. Should the IF RS for SMEs be revised as a resul t of the changes under Chapter
1 and 3 of the Conceptual F ramework?
The majority of SMEIG members recommend no change to the current
requirements during this comprehensive review.Consistent with the SMEIG
recommendation for new and revised IFRSs (see Issue 4), the Conceptual Framework
should only be considered for incorporation when it has been completed under full
IFRSs.
A small minority of SMEIG members recommend aligning the objective and
qualitative characteristics with the amended IFRS Conceptual Framework during
this comprehensive review. These members note that Chapter 1 and 3 of the Framework
are unlikely to be amended further and they do not introduce changes for which
implementation experience of entities needs to be tested.
Issue A.2) Other comprehensive income (Section 5)
65. Should the IFRS for SMEs be revised to requir e all i tems of income and
expense to be recognised in pr ofi t or loss?
The majority of SMEIG members recommend no change to the current
requirements. Consistent with the SMEIG recommendation for new and revised IFRSs
(see Issue 4), these members believe it would be better to wait until the IASB provides
clarity on the conceptual reasoning for transferring items to OCI under the Conceptual
Framework project. They further note that if revaluation of PPE is permitted, it would be
more difficult to remove OCI altogether.
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A minority of SMEIG members recommend removing the concept of OCI from the
I FRS for SMEs. These members recommend that items currently recognised in OCI be
recognised directly in equity.
Issue A.3) Uniform reporting dates for consolidation purposes (Section 9)
66. Should paragraph 9.16 be revised either to allow fur ther simpli fi cation or to
provide additional guidance?
The majority of SMEIG members recommend retaining the impracticable criteria
from deviation from uniform reporting dates.
A small minority of SMEIG members recommend simplifying the impracticable
criterion.They would permit a parent entity to use the financial statements of a
subsidiary if the reporting date of the subsidiary is not more than three months before or
after the balance sheet date of the parent entity.
All SMEIG members feel additional guidance on the necessary adjustments if uniform
reporting dates are not used would be helpful and support adding the following wording
to paragraph 9.16 as suggested by the IASB staff.
If it is impracticable to use the same reporting dates, the parent shall consolidate the financialinformation of the subsidiary using the most recent financial statements of the subsidiary adjustedfor the effects of significant transactions or events that occur between the date of those financial
statements and the date of the consolidated financial statements.
Issue A.4) Definition of a basic financial instrument (Section 11)
67. Does paragraph 11.9 need to be revised so that loans payable in a foreign
currency and loans with standard loan covenants are basic financial
instruments?
The SMEIG recommends that paragraph 11.9 be clarified as suggested by the IASB
staff to correct unintended consequences of the current wording.
Issue A.5) Hedging instruments (Section 12)
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68. Should any changes be made to Section 12s hedge accounting requirements to
permi t additional hedging strategies?
The majority of SMEIG members recommend no change to the current
requirements.The SMEIG note that entities that have the capability to follow other
hedging strategies have the capability to apply the recognition and measurement
requirements in IAS 39. Under Issue 7 the SMEIG recommend that before removing the
fallback to IAS 39 it is important to assess to what extent it was being used in practice.
A minority of SMEIG members recommend removing all requirements for hedge
accounting from the I FRS for SMEs. They note this would not prevent SMEs from
using hedging instruments to hedge risks or from disclosing the effect of doing so. It only
prohibits hedge accounting.
There was very little support for adding additional requirements to Section 12 to cater for
other hedging strategies, eg purchased options. Hedge accounting requirements will,
however, be reconsidered when the IASB considers changes under IFRS 9.
Issue A.6) Accounting for investment property (Section 16)
69. Should Section 16 be revised, eg to permi t a choice of using the cost model or
the fair value model for investment property like IAS 40?
The majority of SMEIG members recommend no change to the current
requirements. These SMEIG members believe the current model is working in practice
so there is no need to change it.
A minority of SMEIG members recommend introducing an option between the cost
and fair value model.
SMEIG discussion
70. The majority of SMEIG members recommended keeping the current
requirements. Whilst some of these members see the benefit of permitting SMEs
the choice of accounting for investment property either under the cost model or
the fair value model, they believed the current model is working in practice and
such a significant change is not necessary.
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71. A few SMEIG members noted that some SMEs are accounting for their
investment property at cost because the cost of hiring an external valuer is
considered to be undue. These SMEIG members supported this interpretation ofundue cost or effort for the SMEs concerned.
72. A minority of SMEIG members expressed concern about potential abuse of the
undue cost or effort exemption and didnt agree that it should be treated as such a
low hurdle. In general these SMEIG members supported giving entities a choice
between the cost and fair value model instead.
73. The broad view of the SMEIG was that further guidance should be added in the
IFRS for SMEsto help SMEs interpret undue cost or effort. The discussion on
undue cost or effort was deferred to Issue A.13 below.
74. Some SMEIG members suggested that investment property could be accounted
for as PPE with the revaluation option as discussed in Issue 5 above. The SMEIG
members generally decided not to pursue this alternative. A few SMEIG members
also felt that if a revaluation option is permitted for PPE, it would be inconsistent
not to allow a choice of fair value or cost for investment property.
Issue A.7) Allocation of the cost of a business combination (Section 19)
75. Should any exemptions fr om fai r value measur ement be included in paragraph
19.14?
The SMEIG recommends the clarification suggested by the staff.
Several SMEIG members note that although the current wording is unclear, they believethat in practice SMEs are already determining deferred tax assets/liabilities and defined
benefit obligations of the acquiree in accordance with Section 28/29 rather than trying to
determine a pure fair value.
76. Should any change be made to provide relief fr om recognising intangible assets
of the acqui ree in a business combinati on?
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The SMEIG recommends that an undue cost or effort exemption should be added to
the requirement to recognise intangible assets separately from goodwill in a business
combination for cost-benefit reasons(subject to comments in Issue A.13).
Issue A.8) Common control exemptions (Section 22)
77. Should an exemption be added to paragraph 22.8 for equi ty instruments issued
as part of a business combination under common control?
The SMEIG recommends that an exemption for equity instruments issued as part of
a business combination of entities or businesses under common control should be
allowed. However the exemption should be clear that those equity instruments can be,
but are not required to be, accounted for under paragraph 22.8 (ie the exemption should
not be absolute).
78. Should an exemption be added to paragraph 22.18 for a distr ibu tion of non-
cash assets contr olled by the same parties before and af ter the distr ibuti on?
The SMEIG recommends that a scope exemption similar to IFRIC 17.5 be
introduced.The SMEIG note that otherwise Section 22 is more onerous than full IFRSs.
The SMEIG support the wording suggested by the IASB staff.
Issue A.9) Related party definition (Section 33)
79. Should the related party defini tion in Section 33 be revised to be consistent with
IAS 24?
The SMEIG recommends that the current definition of a related party should be
revised to be consistent with the definition in IAS 24. This would remove the term
significant voting power which is causing confusion in practice. Plus a definition of
close family member should be added to theIFRS for SMEs.
Issue A.10) Accounting for biological assets (Section 34)
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80. Are the curr ent requirements appropriate for enti ties engaged in agricul tural
activity?
The SMEIG recommend no change to the current requirements.Consistent with the
SMEIG recommendation for new and revised IFRSs (see Issue 4), the current project on
IAS 41 for bearer biological assets should not be considered until the final amendment to
IAS 41 is effective. The SMEIG also think that additional guidance is not necessary for
agricultural activities.
Issue A.11) Extractive activities (Section 34)
81. Are the cur rent requi rements appropri ate for enti ties engaged in the explorati on
for , evaluati on or extraction of mineral r esources?
The SMEIG recommend additional guidance should be added to Section 34 for
entities involved in extractive activities.The SMEIG believe that it is better to include
some guidance, rather than remain silent, to avoid confusion in practice. Guidance should
provide those entities with reassurance that they can use their current accounting policies
(similar to IFRS 6).
Issue A.12) Further reduction in disclosure requirements (several sections)
82. Should any fur ther disclosure reduction be considered in the I FRS for SMEs?
The SMEIG recommend no further simplification of the disclosure requirements.
However, the SMEIG supported the suggestion by the staff that prior year reconciliationsof balances should not be required (currently this is only stated in some sections of the
IFRS for SMEs).
Issue A.13) Undue cost or effort (several sections)
83. Should additional explanation be added to the IFRS for SMEs to help SMEs
interpret and apply the undue cost or effort exemption?
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The SMEIG recommends that Q&A 2012/01Application of undue cost or effort
should beincorporated in to the I FRS for SMEs. The SMEIG also recommends that
further guidance should be provided on the assessment of undue cost and effort.
Finally, the SMEIG recommends that entities applying any of the undue cost or
effort exemptions in the standardshould be required to disclose their reasons for
doing so.
SMEIG discussion
84. The SMEIG felt that Q&A 2012/01Application of undue cost or effortshould
be incorporated into theIFRS for SMEs. There was also broad support for
requiring entities applying any of the undue cost or effort exemptions in the
standard to disclose their reasons for doing so.
85. There was also broad support amongst SMEIG members for the IASB to provide
further clarity on how the undue cost or effort exemption should be applied. This
is because there are mixed views in practice, and amongst SMEIG members, on
how the exemption should be interpreted. The main views expressed by SMEIG
members are as follows:
(a) Some SMEIG members felt the undue cost or effort exemptionis
intended to be a relaxation of the impracticable exemption and the focus
should be on whether or not the requirement results in excessive cost or
effort for SMEs.
(b) Others felt that determination of whether the amount of cost or effort is
excessive requires consideration of how the economic decisions of the
users of the financial statements could be affected by the availability of
the information. This is the view expressed in the Q&A. However, there
were also mixed views within SMEIG members on how that user group
should be defined for the purposes of the exemption:
(i) Some believed it should focus on a hypothetical broad
user group to be consistent with the fact that entities are
preparing general purpose financial statements that are
intended for a broad user group.
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(ii) Others believed the SME should only consider its own
specific user group. However it was noted that in reality
the user group may be bigger than envisaged by the SME,
eg do they know if credit rating organisations are using
their financial statements.
Issue B.1) Reduced disclosure framework for subsidiaries
86. Should the IASB consider a potenti al project, outside the IFRS for SMEs, to
develop a reduced disclosure framework for subsidiar ies of a l isted group?
The SMEIG recommends that this be a potential project for the consideration of the
IASB as there is significant worldwide demand for an international reduced
disclosure framework for subsidiaries of listed group.
SMEIG discussion
87. There was broad support amongst SMEIG members for suggesting this as a
potential project to the IASB. It was noted at the meeting that there is significant
demand across the world for an international reduced disclosure framework for
subsidiaries of listed groups. Several jurisdictions have already developed their
own framework.
88. Several SMEIG members noted that this would not need to be a long project if the
scope of the project is pre-defined. One SMEIG member said the UK reduced
disclosure framework (FRS 101) is only approximately 10 pages long. It was
noted that a starting point for the scope of the project could be to use the same
criteria as the scope exemption from producing consolidated financial statements
(IFRS 10.4(a)).
Issue B.2) Size-dependent reliefs
89. Should the IASB consider adding size-dependent reli efs fr om some of the
requirements in the IFRS for SMEs?
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The SMEIG recommends that the IASB not consider size-dependent reliefs from
requirements in the I FRS for SMEs.
Issue B.3) Name of the Standard
90. Should the IASB reconsider the name of the Standard?
The SMEIG recommends that the title of the standard should not be changed.The
title of the standard is well established as a brand. Furthermore, it has been incorporated
in the national law in many jurisdictions and changing the law would cause significant
problems.
91. Several SMEIG members noted that the title is a problem because it doesnt
describe the entities in its scope. However, the broad view of the SMEIG was
because the title of the standard is well established as a brand it should not be
changed now. Several SMEIG members noted that theIFRS for SMEshas been
incorporated in the national law in many jurisdictions and changing those laws
would cause significant problems.
92. As noted in paragraph 21 there is general support amongst SMEIG members for
including additional guidance in the Preface to theIFRS for SMEsto clarify the
objective of theIFRS for SMEsto help jurisdictions. This would counteract any
confusion caused by the name of the Standard. SMEIG members also generally
felt that the IASB should interact with local standard setters to help them better
understand the purpose of theIFRS for SMEs, particularly if the scope of theIFRS
for SMEsis opened up to other entities (see Issues 1 and 2).
Part III: Other points raised by SMEIG members
Section 1
93. Several SMEIG members noted that some jurisdictions do not clearly understand
the concept of general purpose financial statements. Some SMEIG members
suggested that staff review the drafting in the Preface to the IFRS for SMEsto
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ensure it explains this concept clearly. Also the IASB should consider other ways
of educating the standard setters.
Section 22
94. A few SMEIG members noted that the requirement to measure unlisted equity
instruments at fair value if the fair value can be measured reliably is causing
problems. In practice this means SMEs need to try to determine fair value and if
they can, they have to do this on an annual basis regardless of the cost. This
requirement is inconsistent with requirements elsewhere in the standard for the
valuation of difficult to measure items. These SMEIG members recommend that
the IASB consider allowing an undue cost or effortexemption from
measurement of such instruments, as has been done for biological assets and
investment property.
Section 23
95. A few SMEIG members suggested the IASB should consider adding guidance on
barter transactions as such transactions occur frequently for some SMEs.
General
96. A view supported by a few SMEIG members was to allow jurisdictions to adopt
theIFRS for SMEsaugmented to allow or require use of full IFRSs in certain
areas to meet their local requirements. For exampleIFRS for SMEsaugmented by
full IFRSs requirements for revaluation of PPE. There was some debate amongst
SMEIG members on whether or not such a standard could be called IFRS for
SMEsaugmented by. to give it international recognition. Or whether IFRS
for SMEswould need to be removed from the title and it would need to be named
as a local GAAP.
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